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AII Corporation is currently experiencing a bad debt ratio of 5%. John Jonathan is convinced that, with looser credit controls, this ratio will increase to 8%; however, he expects sales to increase by 15% as a result. The cost of goods sold is 75% of the selling price. Per $1,000 of current sales, what is John's expected profit under the proposed credit standards?

User KooiInc
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Answer: $1,103.37 per $1,000 sales.

First, let's calculate the current bad debt amount:

Bad Debt = 5% x Current Sales
Bad Debt = 0.05 x Current Sales

Next, let's calculate the cost of goods sold per $1,000 of current sales:

Cost of Goods Sold = 75% x Selling Price
Cost of Goods Sold = 0.75 x Selling Price
Cost of Goods Sold per $1,000 = 0.75 x $1,000
Cost of Goods Sold per $1,000 = $750

Now, let's calculate John's expected sales under the proposed credit standards:

Expected Sales = Current Sales x (1 + Sales Increase)
Expected Sales = Current Sales x (1 + 0.15)
Expected Sales = 1.15 x Current Sales

Using John's assumption, the bad debt ratio under the proposed credit standards would be:

Bad Debt = 8% x Expected Sales
Bad Debt = 0.08 x 1.15 x Current Sales
Bad Debt = 0.092 x Current Sales

Now, let's calculate John's expected profit under the proposed credit standards:

Expected Revenue = Expected Sales x Selling Price
Expected Revenue = 1.15 x Current Sales x Selling Price

Expected Cost of Goods Sold = Cost of Goods Sold per $1,000 x (Expected Sales / $1,000)
Expected Cost of Goods Sold = $750 x (1.15 x Current Sales / $1,000)
Expected Cost of Goods Sold = $862.50 x Current Sales / $1,000

Expected Bad Debt Expense = Bad Debt / $1,000 x Expected Sales
Expected Bad Debt Expense = 0.092 x Current Sales / $1,000 x 1.15 x Current Sales
Expected Bad Debt Expense = $105.80 x Current Sales / $1,000

Expected Profit = Expected Revenue - (Expected Cost of Goods Sold + Expected Bad Debt Expense)
Expected Profit = [1.15 x Current Sales x Selling Price] - [$862.50 x Current Sales / $1,000 + $105.80 x Current Sales / $1,000]
Expected Profit = $1,107.37 x Current Sales / $1,000

Therefore, John's expected profit under the proposed credit standards is $1,107.37 per $1,000 of current sales.
User Grissel
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